Friday, July 6, 2018

IRS implies that payments made inn 2017 for 2018 real property taxes will not result in a property tax deduction for 2017

In Information Letter 2018-0009 the IRS has implied that actions taken in Dec. 2017 by  the New Jersey Department of Community Affairs, which ordered NJ municipalities to accept payments for 2018 property taxes in calendar year 2017, will not result in those payments generating 2017 federal income tax deductions.

One of the provisions of the Tax Cuts and Jobs Act (TCJA) limited post-2017 annual deductions for real property and other state and local taxes to a maximum of $10,000. Another TCJA provision increased the standard deduction for 2017 and thereafter. As a result of these two changes, many taxpayers will not get a full benefit for their 2018-and-later payments of nonbusiness real property taxes.

 Code Sec. 164(b)(6) , as amended by TCJA, provides that a taxpayer who, in 2017, pays an income tax that is imposed for a tax year after 2017, cannot claim an itemized deduction in 2017 for that prepaid income tax.

In December, 2017, IRS announced that a prepayment of real property taxes is deductible in the year of prepayment, e.g., 2017, only if the property tax is assessed in the year of prepayment. (IR 2017-120) State or local law determines whether and when a property tax is assessed, which is generally when the taxpayer becomes liable for the property tax imposed. In the pronouncement the IRS provided the following illustrations:

Illustration. Assume County A assesses property tax on Jul. 1, 2017 for the period Jul. 1, 2017 - Jun. 30, 2018. On Jul. 31, 2017, County A sends notices to residents notifying them of the assessment and billing of the property tax in two installments, with the first installment due Sept. 30, 2017 and the second installment due Jan. 31, 2018. Assuming taxpayer has paid the first installment in 2017, the taxpayer may choose to pay the second installment on Dec. 31, 2017 and may claim a deduction for this prepayment on the taxpayer's 2017 return.

Illustration. County B also assesses and bills its residents for property taxes on Jul. 1, 2017, for the period Jul. 1, 2017 - Jun. 30, 2018. County B intends to make the usual assessment in Jul. 2018 for the period Jul. 1, 2018 - Jun. 30, 2019. However, because county residents wish to prepay their 2018-2019 property taxes in 2017, County B has revised its computer systems to accept prepayment of property taxes for the 2018-2019 property tax year. Taxpayers who prepay their 2018-2019 property taxes in 2017 will not be allowed to deduct the prepayment on their federal tax returns because the county will not assess the property tax for the 2018-2019 tax year until Jul. 1, 2018.

On December 27, 2017 then New Jersey Governor Chris Christie issued Executive Order 237 essentially requiring municipalities to accept payments for 2018 property taxes in calendar year 2017, and to credit payments postmarked on or before Dec. 31, 2017, as received in calendar year 2017 (NJ Order). The state agency charged with implementing the NJ Order, the New Jersey Department of Community Affairs, issued a similar requirement in Local Finance Notice 2017-28. The NJ Order cites existing New Jersey law that permit taxes to be received and credited prior to the dates otherwise fixed for payment. That law is N.J. Rev. Stat. §§ 54:4-66(e) and 54:4-66.1(f), which provide that taxes may be received and credited as payments at any time, even prior to the dates herein before fixed for payment, from the property owners, their agents, or lien holders.

In February, 2018, New Jersey Attorney General Gurbir Grewal wrote IRS, arguing that New Jersey taxpayers who paid 2018 property taxes on or before Dec. 31, 2017 should be eligible for deductions in 2017 and asking IRS to confirm that analysis. Pointing to the NJ Order and the Local Finance Notice, he said that "State statutes, executive orders, and agency notices are clear that residents may satisfy property tax assessments in advance and payments must be credited at that time. I see no basis for the IRS to refuse to do the same." He also noted, "...while the TCJA did establish that income tax prepayments should be credited in 2018, that law did not impose the same rule on property tax prepayments. And so, relying on the text of the law, thousands of New Jersey taxpayers rushed to pay their taxes in order to qualify for the SALT [state and local tax] deduction."

In a letter to the New Jersey attorney general, IRS has implied that it disagrees with his position. The IRS noted that, before the passage of the TCJA, IRS has consistently taken the position during examinations that the deduction for state and local real property taxes is allowable as long as the tax is both paid and imposed (or assessed) in the tax year. The IRS said that, on the rare occasions this position has been challenged, courts have upheld IRS's interpretation. See Estate of Hoffman, 87 AFTR 2d 2001-2119 (4th Cir. 2001 where the Court of Appeals for the Fourth Circuit upheld a Tax Court decision disallowing the deduction for a prepayment of property taxes because the tax had not yet been assessed.

In the letter the IRS said that the TCJA did not change Code Sec. 164 relating to property tax prepayment. As such, IRS's longstanding position remains the same and is reflected in IR 2017-120. Thus, if a state or local taxing jurisdiction imposed tax on real property by the end of 2017, the amounts paid in 2017 are deductible on a taxpayer's 2017 tax return. If the tax was not imposed by a state or local taxing jurisdiction by the end of 2017, the requirements for the deduction under Code Sec. 164 are not satisfied in that year, and the deduction is therefore not allowable in 2017.

Monday, July 2, 2018

Ne Jersey Tax Amnesty

Tax Amnesty

  • A-3438 provides for a 90-day tax amnesty period to run through no later than January 15, 2019.
  • Under the new amnesty, any taxpayer with liabilities for returns due on or after February 1, 2009, can pay the tax, plus half the interest due as of November 1, 2018 and avoid any penalties with the exception of criminal and civil fraud penalties.
  • An eligible taxpayer cannot be notified of or be under criminal action or investigation.
  • The new law also imposes a 5 percent non-participation penalty for liabilities eligible for amnesty that are subsequently discovered by the Division of Taxation.

Tuesday, June 19, 2018

New York and New Jersey Workplace Harassment and Discrimination Laws

Recently, both New York and New Jersey have passed laws that address workplace harassment and other forms of discrimination

Employers should understand that the legal environment on federal, state and even city levels are rapidly changing and that there will be no tolerance for workplace harassment that is permitted or suffered with no effective response. Workplace harassment exposes the employer to strict liability. This simply means that, if it happens in your workplace, you will have the legal
responsibility for the damages (compensatory, punitive and legal fees). UNLESS:

you have an up-to-date policy (including any new requirements of recently passed laws),

the policy is periodically published and discussed with the rank and file,

supervisors are properly trained on what to do when they see or hear of improper conduct

and that it is made abundantly clear to all that there will be ZERO TOLERANCE for

unwanted sexual advances or other forms of discrimination or bullying in the workplace. 


Effective immediately, New York State has expanded mandated protections against sexual harassment for even non-employees, including contractors, subcontractors, vendors and This change has the biggest potential impact because businesses now have a whole new category of possible plaintiffs that can sue a company for sexual harassment. The legislation amends the New York State Human Rights Law to ensure that regardless of their specific title or role, all individuals are protected against sexual harassment in the workplace. Another provision of the amended law, effective July 11, 2018, prohibits companies from using non-disclosure clauses in settlements or agreements relating to claims of sexual harassment unless they are agreed to by the complainant. Mandatory arbitration clauses applicable to claims of sexual harassment are also prohibited (other forms of discrimination are not exempted, however). Effective October 9, 2018, employers will be required to distribute written workplace harassment policies to all employees and provide annual anti-harassment training, based upon models to be developed and published by the New York State Department of Labor and Division of Human Rights.


Not to be outdone by the state, the New York City Council also very recently passed the Stop Sexual Harassment in NYC Act (the “Act”). The Act amends the New York City Human Rights Law (“NYCHRL”) and the New York City Charter. New York City employers must be familiar with both state and city requirements and, where such requirements may overlap, ensure they are meeting the requirements of both laws. A key requirement of the New York City law is that employers with 15 or more employees (including interns) conduct annual anti-sexual harassment training for all employees, including supervisory and managerial employees. This required training must cover a number of topics, including definitions and examples of sexual harassment, educate on bystander intervention, and explain how to bring complaints both internally and with applicable federal, state and city administrative agencies. The training must be conducted on an annual basis for incumbent employees, and new employees, who work 80 or more hours per year on a full or part-time basis in New York City, must receive the training within 90 days of initial hire. The law further requires employers to obtain from each employee a signed acknowledgment that he or she attended the training. The NYC Commission on Human Rights (“City Commission”) will be publishing online sexual harassment training modules for employers’ use, and these will satisfy the requirements of the Act so long as the employer supplements the module with information about the employer’s own internal complaint process to address sexual harassment claims. Required posters concerning the law will be provided by the City Commission.


As of October 31, 2017, New York City made it illegal for public and private employers of any size to inquire about an applicant’s salary history during the hiring process, including in advertisements for positions, on applications or in interviews. Rather than relying upon salary history, employers must base compensation offers on the applicant’s qualifications and the requirements for the job. The prohibition is based upon the assumption that salary history perpetuates a cycle of inequity and discrimination in the workplace, especially for women and people of color. While this prohibition only applies to New York City, it should be anticipated that policy is a trend and that the states will soon follow. Accordingly, it is recommended that job applications and pay policies be reviewed to anticipate this very predictable change.


As we have recently alerted our clients, New Jersey passed the Diane B. Allen Equal Pay Act which becomes effective July 1, 2018. This Act amends New Jersey’s powerful Law Against Discrimination (NJLAD) to forcefully ban pay disparities based on any characteristic relating to an employee’s membership in one of the many classes protected by the NJLAD. Thus, under the Allen Act, it is an unlawful employment practice to pay less to any member of a protected employee category for “substantially similar work.” Compliance failures will now expose employers to six years of damages, mandatorily trebled plus attorneys’ fees. Employers must not sit on their hands, and are urged to immediately engage in critical reviews of present pay practices to ensure that compensation is tied to legitimate factors such as training, education, past experience, quality of work or measurable factors of productivity. Job titles and responsibilities should be reviewed to ensure that they properly tie into objective wage standards, although subjective factors cannot be eliminated altogether. It is recommended, among other things, that formal Job Descriptions be adopted and pay practices, after review, be formalized, subject to continuing periodic, critical review.


On May 2nd, New Jersey became the tenth state to enact a statewide mandatory paid-sick-leave The New Jersey Paid Sick Leave Act will go into effect on October 29, 2018. Once effective, New Jersey employers of all sizes, including temporary help services firms, will be required to provide up to 40 hours of paid sick leave per year to covered employees. Consequently, every affected employer must start to prepare policies and practices to comply with the Act. The Act expressly excludes employees in the construction industry employed under a collective bargaining agreement, per diem healthcare employees, and public employees who already have sick leave benefits. The Act requires employers to designate any period of 12 consecutive months as a “benefit year”, and the established benefit year cannot be changed without first notifying the New Jersey Department of Labor and Workforce Development. In each benefit year, an employee will accrue up to 40 hours of sick time at a rate of one hour for every 30 hours worked. Alternatively, employers may opt to “frontload” the full 40 hours at the beginning of the benefit year in order to avoid the record-keeping requirements. Employers with existing paid time off (PTO), personal days, vacation days and sick-day policies may utilize those policies to satisfy the requirements of the act as long as employees can use the time off as required by the act. In the case of a temporary help service firm placing an employee with client firms, paid sick leave will accrue on the basis of the total time worked on assignment with the firm, not separately for each client firm to which the employee is assigned.

As should be clear from the above, the time to act is NOW. Delay or inaction can and will lead to potentially painful consequences.  Please contact Gary Young or the Scarinci Hollenbeck attorney with whom you work with to schedule an appointment to review the law, your employment practices and next steps towards effective compliance.


Friday, April 27, 2018

FBAR violation can be shown by preponderance of the evidence and willfulness by reckless conduct

Under the Bank Secrecy Act, U.S. citizens must file an FBAR with the U.S. Treasury disclosing any financial account in a foreign country with assets in excess of $10,000 in which they have a financial interest, or over which they have signatory or other authority.

Those who willfully fail to file their FBARs on a timely basis can be assessed a penalty of up to the greater of $100,000 or 50% of the balance in the unreported bank account for each year they fail to file a required FBAR. IRS has discretion as to the amount of the penalty, subject to these limits

A "reasonable cause" exception exists for non-willful violations, but not for willful ones.

Courts have previously considered the level of the burden of proof needed sustain civil penalties for a willful failure to file the FBAR disclosure by holding that the preponderance of the evidence standard governs suits by IRS to recover civil FBAR penalties[1].

A number of courts have found that willfulness in the civil FBAR context includes reckless conduct[2].

In a case dealing with a fraudulent misrepresentation claim, the Supreme Court held that a heightened clear and convincing burden of proof applies in civil matters "where particularly important individual interests or rights are at stake." (Herman & MacLean v. Huddleston, 459 U.S. 375 (S Ct 1983)) Such interests include parental rights, involuntary commitment, and deportation. The lower, more generally applicable preponderance of the evidence standard applies, however, where "even severe civil sanctions that do not implicate such interests" are contemplated.

In U.S. v. Garrity, 121 AFTR 2d ¶2018-629, (DC CT, 4/3/2018) the IRS filed suit to reduce to judgment a civil penalty that it assessed against Paul G. Garrity, Sr. for his alleged willful failure to report his interest in a foreign account that he held in 2005.

In anticipation of trial, the parties submitted briefs addressing the legal question of what standard of proof governs; preponderance of the evidence or clear and convincing evidence. IRS argued that the standard of proof was preponderance of the evidence. The taxpayer argued that the standard of proof was clear and convincing evidence.

The parties also briefed the separate question of whether IRS must show that Mr. Garrity, Sr. intentionally violated a known legal duty to establish a "willful" FBAR violation (as the taxpayer's representatives contended) or whether IRS may satisfy its burden of proof by showing that Mr. Garrity, Sr. acted recklessly (as IRS contended).

The district court determined that IRS must prove the elements of its claim for a judgment by a preponderance of the evidence and that proof of reckless conduct would satisfy IRS's burden on the element of willfulness.

The district court found that the civil FBAR penalty did not implicate important individual interests or rights. The court reasoned that the fact that the taxpayers might be liable for a substantially larger sum of money for a willful FBAR violation than if IRS had pursued a civil tax fraud action did not warrant a higher standard of proof. As Huddleston indicated, it was the type of interest or right involved that triggered a higher standard of proof, not the amount in controversy. 

The district court reasoned that the sanction that the taxpayer might be exposed to, regardless of how "draconian" it might be, was monetary only. Despite characterizing the taxpayer's exposure to a monetary sanction as implicating a "property interest that require[s] protection" the taxpayer's representatives had not demonstrated how the penalty IRS sought would affect important individual interests or rights to warrant a higher standard of proof.

The taxpayer's representatives also argued that IRS's proof of willfulness likely would involve allegations of fraud, which could tarnish Mr. Garrity, Sr.'s reputation, implicating a more important interest than those involved in typical civil cases. But the court, looking to Huddleston and noted that even allegations of fraud did not necessitate a higher standard of proof. Unlike a large number, and perhaps the majority, of the States, Congress had chosen the preponderance standard when it has created substantive causes of action for fraud.

While the taxpayer's representatives conceded that numerous courts had found that willfulness in the civil FBAR context included reckless conduct, relying principally on criminal cases, they maintained that IRS must prove that Mr. Garrity, Sr. intentionally violated a known legal duty in order to satisfy the element of willfulness, and that proof of reckless conduct was insufficient. The district found that the taxpayer's representatives ignored the clear distinction that the Supreme Court had drawn between willfulness in the civil and criminal contexts[3]. The taxpayer's representatives pointed to no other authority that would warrant deviating from the Supreme Court's holdings that statutory willfulness in the civil context covered reckless conduct.

The District Court held that IRS may prove that a taxpayer failed to timely file a Foreign Bank and Financial Accounts Report (FBAR) by a preponderance of the evidence rather than by a higher, clear and convincing evidence standard. The court also determined that IRS could show willfulness on the taxpayer's part by proof of his reckless conduct and did not need to show that he intentionally violated a known legal duty.


[1] (Bedrosian v. U.S., (DC PA 9/20/2017) 120 AFTR 2d 2017-5832 ; U.S. v. Bohanec, (DC CA 2016) 118 AFTR 2d 2016-6757 ; U.S. v. McBride, (DC UT 2012) 110 AFTR 2d 2012-6600 ; U.S. v. Williams, (2010, DC VA) 106 AFTR 2d 2010-6150 , rev'd on other grounds, U.S. v. Williams, (CA 4 2012) 110 AFTR 2d 2012-5298
[3] See Ratzlaf v. U.S.,(S Ct 1994) 510 U.S. 135.

Monday, April 16, 2018

Distributions from account that had ceased to be an IRA were not taxable

Stacey Marks owned a retirement account, the custodian of which was the Argent Trust Co. (the Argent account). Before 2005, the Argent account qualified as an IRA.

In 2005, the Argent account made a $40,000 loan to Marks' father. It received a promissory note in exchange. In 2012, the Argent account made another loan, of $60,000, to one of Marks' friends, again receiving a promissory note in exchange.

As of December 2013, the Argent account had the following assets: (1) the two notes (with a combined face value of $100,000) and (2) $96,508 in cash. In December 2013, Marks opened a new retirement account, the custodian of which was the Equity Trust Co. (the Equity account). In December 2013, Marks attempted to roll over the assets of the Argent account to the Equity account.

On her 2013 tax return, Marks did not report that she had received a taxable distribution from the Argent account.

IRS initially determined that Marks successfully rolled over the $96,508 into the Equity account, but that the two notes were not successfully rolled over and thus had to be included in income in 2013. In its deficiency notice, IRS found that she had received a $98,000 taxable distribution from the Argent account (representing the two notes; it's unclear why they weren't valued at their full $100,000 face value), and that this amount was subject to the 10% additional penalty on early distributions under Code Sec. 72(t), and that Marks had a substantial underpayment of tax and was thus subject to a $7,071 accuracy-related penalty.

Marks challenged the determination, asserting that the two notes were distributed to her then rolled over into the Equity account.

The Tax Court, after reviewing the parties' positions, ordered them to file additional memoranda addressing the effect of the prohibited transaction rule under Code Sec. 408(e)(2)(A).

Both sides agreed that, by making the loan to Marks' father in 2005, the Argent account had engaged in a prohibited transaction and ceased to be an IRA.

Accordingly, as agreed by the parties, the Tax Court held that Marks was not required to include the $98,000 in income for 2013 because the distribution was not from an IRA. As a result, the early distribution penalty didn't apply, and there was no substantial understatement of tax giving rise to a penalty under Code Sec. 6662.
What the court did not address was whether a tax can be levied against the taxpayer for the prohibited transaction in 2005. As the audit year was 2013 it is likely that the 3 year and 6 year statute of limitations has expired and barring fraud there would be no way for the IRS to make an assessment.

Tuesday, March 27, 2018

Pass-Through Guidance Out By Summer At Earliest, IRS Says

The Internal Revenue Service will likely issue further guidance on the rule that affects how pass-through entities are taxed under the new federal tax law by late summer or early fall, the agency’s top official said Monday.

David Kautter, the acting IRS commissioner and Treasury assistant secretary for tax policy, said the IRS was working to provide answers surrounding this provision of the rule, Internal Revenue Code § 199A, in the wake of the federal tax overhaul. The guidance is essentially being built from the ground up.

Until then advice to client should be limited.  If late summer means early fall...will there be any time to plan?

Monday, March 19, 2018

Will the IRS Increase Criminal Prosecutions Now That the OVDP Program is Ending?

 As previously reported the IRS has announced that the offshore voluntary disclosure program (OVDP) will be closing on September 28, 2018. It appears that the program which began in 2009 only had 56,000 taxpayers who used one of the programs to comply voluntarily. This is an underwhelming number of taxpayers. Indeed they were only 600 disclosures in 2017. What does that mean?

 Since 2009, the IRS criminal investigation unit has investigated 1545 taxpayers on criminal violations related to international activities, of which 671 were indicted on international criminal tax violations.

 The IRS is now sending a clear signal that rather than relying on the voluntary disclosure program it will increase criminal prosecutions to effect compliance. Those who have not complied should heed this warning and file a disclosure before the deadline or otherwise face criminal prosecution!